IR35 defeat costs IT contractor £99,000

An IT contractor who self-funded his training, paid to remotely access his client's database and worked at another outfit was tantamount to an employee and owes £99,000 in taxes.

Jon Bessell, director of Dragonfly Consultancy Ltd, lost his IR35 appeal because he became "integrated" into his client's firm between 2000 and 2003, Special Commissioner Charles Hellier ruled last month .

During these dates, as a systems tester for the AA, the roadservices group, Mr Bessell's work was not subject to "detailed review" by his test manager and was "not told how to conduct" it.

But Mr Hellier, who later rejected the IR35 appeal of another IT contractor - MKM Computing Ltd , ruled that, in practice, Mr Bessell was "part of a team" and was controlled by his client.

Mr Bessell went to weekly progress reviews, joined team talks about urgent issues and was able to be spot-checked, the Special Commissioner (SC) said in a judgement similar to MKM's.

In this ruling, Mr Hellier cited the upper contract, the agreement between the AA and DPP International Ltd, Mr Bessel's recruitment agency, as evidence of employee-style control.

Seemingly a surprise to Mr Bessell, the contract states DPP would "provide a consultant to perform certain services for the client [AA] under the client's [AA's] direction."

"As in the MKM case," said Kate Cottrell, an IR35 advisor at Bauer & Cottrell, "the SC identified the conflicts between the upper and lower contracts particularly in relation to control".

"Just like the MKM case, the contractor was part of a team headed by a manager who was responsible for drawing up the testing plans.

"The contractor had to do the tasks allocated to him and his work could be spot-checked and monitored.

"It made no difference if these checks were made by another independent contractor or by the client's employees."

Bob, the retired tax inspector, said he believes that in both Dragonfly and MKM, the same Special Commissioner found "IR35 applies, in each case, based on control."

He added: "[In the judgement of Dragonfly] the Special Commissioner…is of the opinion that he [Mr Bessell] worked as part of team - there was team discussion and a team manager."

"[The Special Commissioner supposes] was Mr Bessell in business on his own account? He concluded that [Mr Bessell] worked on parts of a project that were allocated to him - within the AA's teams which are integrated into the AA business. [The SC] is therefore of the opinion that Mr Bessell was a 'professional employee'."

Asked about whether working as part of a team is a considered an indicator towards IR35, the Revenue yesterday implied it probably was, albeit not a decisive one if in isolation.

Reflecting on the Dragonfly case, a HMRC spokesman said: "One of the aspects considered was whether the notional contract would provide the client with a right of control consistent with a contract of service".

"The Special Commissioner found in both cases that the end client had a right of control over what work was to be done and when. Such control was consistent with a contract of employment.

"Although the fact that the workers operated as part of a team was integral to the workers arrangements, and may have influenced the consideration of 'control', the notional contracts were not found to be contracts of service solely because the workers operated as part of a team. On its own this [working in teams] is not a determinative factor."

Elsewhere in the SC's ruling, it was found that there was not a time during Mr Bessell's work at AA when "he took a holiday at a seriously inconvenient time for the project on which he was engaged."

Aside from control, the Special Commissioner was not convinced that there was an unfettered right to substitute, despite confirmations in two letters from client representatives.

Of one of the letters, the SC reflected: "Although the letter did not indicate that the AA would wish to approve the substitute first, it was not to my mind absolutely clear that the writer intended to say that the AA did not regard itself as being entitled to require that it approved the substitution or that it would in practice wish to do so in the relevant period."

In terms of substitution, he concluded: "The AA did not want any competent tester, it wanted Mr Bessell."

The contract signed by Mr Bessell was for 40 hours of work each week plus an overtime facility (which had a limit) and contained a notice period.

The SC decided that the client was paying for the availability of the contractor and if he turned up and there was no work to do, then they were contractually obliged to pay him.

"Without an obligation to pay for availability what was the point of the notice periods?" Mr Hellier asked.

He decided that although "in practice Mr Bessell was very rarely left twiddling his thumbs… the 'arrangements' included payments for availability rather than just for work done."

Elsewhere in the judgement, the SC noted than Mr Bessell paid for his own training, and self-funded an ISDN line installation to access the AA's central IT system from home.

However just as Mr Bessell provided some of his own IT equipment, and once worked for a nursery during the contested period of his work, these factors each pointed only "weakly" or "marginally" away from employment.

Overall, there was "little" in Mr Bessell's day-to-day work to support that he was in business of his own account, prompting the SC to say the contractor was "integrated" into the client's organisation.

Mr Hellier delivered a similar verdict in rejecting the IR35 appeal of MKM Computing Ltd, when he said its director, "Mr Ellwood would have had little opportunity to increase his profit and was not conducting any form of undertaking." Mr Ellwood, he said, became "part and parcel" of his client's organisation.

In rejecting Dragonfly's IR35 appeal, Mr Hellier said: "Mr Bessell did not get paid for, or go to work to provide, a specific product; instead he provided his services to the AA to be used by them in testing the parts of a project which from time to time were allocated to him.

"He was engaged in relation to the work to be done on a specific project but not to deliver anything other than his services in providing testing in relation to that project. In my opinion he would have been an employee had he been directly engaged by the AA."

When studied together, IR35 advisors said that the MKM and Dragonfly judgements both "highlight the need to ensure that there are no conflicting terms in the contracts in the chain."

Ms Cottrell explained: "We have seen many cases here where the upper contract conflicts with the lower one making the lower contract little more than a sham.

"Contracts should reflect the actual working arrangements and any changes to contracts should be agreed with the agency and the client. Many agencies are happy to confirm the position with their clients and some have a clause in the lower contract confirming that the contracts are back to back.

"Perhaps it is now time in light of these two losses for all agencies to adopt this practice so we can quickly move to a situation where everyone knows their true IR35 status at the outset."

Told that one of its former tax inspectors believes it is "more than understandable" that contractors want more clarity on IR35, a Revenue official pointed out that guidance is available on its website .

He said the guide provides advice on the application of the legislation and details which factors need to be taken into account when considering whether an engagement comes within the IR35 legislation.